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Chapter 20 The Effects of Government Farm Programs

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Title: Chapter 20 The Effects of Government Farm Programs


1
Chapter 20 The Effects of Government Farm
Programs
  • Presented by
  • Josh Morgan and
  • Kristin Mackie

2
Overview
  • The objective of this chapter is to describe the
    major effects of government programs in
    agriculture as a whole
  • Farm Programs and related expenditures are
    classified into several broad categories and the
    major winners and losers in each category are
    identified.

3
Programs That Increase Product Prices To Farmers
  • Product prices may be increased by decreasing
    supply or by increasing demand. (graph 20.1
    pg.305)
  • Programs may reduce supply in a number of ways,
    depending on the specific nature of the
    particular program.
  • Production controls reduce the supply of farm
    products, thereby increasing prices to farmers.
  • Various domestic and foreign food assistance and
    nutrition programs increase the demand for farm
    products through government purchases, food
    subsidies, and export subsidies, thereby
    increasing product prices.

4
Farm Bills
  • The 1996 farm bill eliminated production controls
    for wheat, rice, cotton, feed grains, and sugar
  • The 2002 farm bill dismantled the system of
    peanut marketing quotas, and in October 2004 the
    tobacco program was eliminated.
  • The supply of farm products is also reduced by
    restrictions on imports of price-supported
    products, which were imposed to prevent consumers
    from consuming lower-priced imported products
  • The results is to reduce supply and to increase
    product prices to farmers. Government purchases
    of farm products increase demand and product
    prices (graph 20.2 pg. 306)

5
Food Assistance and Nutrition Programs
  • Various food assistance and nutrition programs
    increase the demand for farm products through
    government purchases, food subsidies, and export
    subsidies which increases product prices.
  • Price supports of milk are are implemented
    through government purchases of manufactured milk
    products.
  • Food stamps, school lunches, and other assistance
    programs increase the demand for farm products by
    subsidizing food purchases.
  • A wide range of domestic and foreign aid programs
    continue to be important in maintaining the
    demand for U.S agricultural products.

6
International Agreements
  • International grain agreements for five and four
    year periods (made with China and Russia) were
    designed to stabilize prices and to increase
    overall demand for U.S grain.
  • The agreements specified a range of grain exports
    to these nations each year at market prices.
  • The agreements may, increase the demand for U.S.
    farm products to some extent.

7
Programs that reduce prices
  • Government subsidies for agricultural credit and
    electric power, conservation of land and water
    resources (including flood control, irrigation,
    and land reclamation),and research and extension
    services reduce farm production costs, increase
    output, and decrease produce prices. (graph 20.3
    pg. 307)
  • Subsidized credit provided by FSA (Farm Service
    Agency), for example adds to total resources in
    agriculture by providing more credit than would
    be available at competitive market rates and
    terms
  • Research and extension activities reduce per unit
    costs and increase total farm output.

8
NRCS
  • Natural Resource Conservation Services provides
    cost to farmers to carry out conservation and
    environmental practices and is also involved in
    the development of soil and water conservation
    programs.
  • Subsidized soil conservation and research
    activities tend to increase production in the
    long run, whereas irrigation and floodwater
    control provide immediate increases in output.

9
Department of Interior Water and Power Subsidies
in the West
  • Irrigation is highly important to agricultural
    production in the West, and water is frequently
    priced to farmers below its value in
    nonagricultural uses.
  • The farmers in the west receive a majority of
    their water supply through the Bureau of
    Reclamation.
  • Irrigation systems also use artificially
    low-priced electricity produced by federally
    funded dams to pump groundwater for irrigation.
    Approximately 150,000 farms benefit from federal
    water projects The value of irrigation for a 160
    acre farm in CA, my be in excess of 100, 000

10
Agricultural Production in the West
  • Production in the west has been significantly
    increased through power and water subsidies.
  • Without irrigated water CA would be relatively
    unimportant in agricultural production.
  • CA is the leading agricultural state in the
    United States.
  • The water and power subsidies in the west not
    only distort the geographical pattern of
    agricultural production within the U.S., but it
    also increases the scarcity of water for
    recreation and urban uses in the west.

11
Net Effects Who Wins? Who Loses?
  • Because some programs increase product prices
    received by farmers at the same time that other
    programs decrease prices, some of the
    expenditures are offsetting.
  • Although 38 billion was spent on farm programs
    that increased farm product prices almost
    one-third as much was spent on programs that
    decreased farm product prices.

12
Consumers and Taxpayers
  • Because of farm programs (many comparable to the
    New Deal) prices of sugar, milk, fresh oranges,
    and a number of other products are higher then
    they would be without the programs.
  • U.S. consumers pay for, and support these
    programs through higher prices on goods and
    through higher taxes.

13
Owners of Specialized Resources
  • Within the agricultural sector, owners of land,
    allotments, and other specialized resources are
    the biggest gainers from farm programs.
  • In the case of the tobacco price support program,
    for example, the market value of the right to
    produce often exceeds 1,000 per acre, per year.
  • Some gains are achieved through political efforts
    which consists of lobbying and political
    contributions.
  • Normally the owners of land and producion rights
    at any given time are not the same people who
    received the windfalls when the programs were
    initiated

14
Farmers as Producers vs. Farmers as Asset Owners
  • The distribution of gains between producers and
    asset owners depends on how quickly the expected
    benefits or costs of program changes are
    incorporated into asset values.
  • Many owners of land and other farm assets are not
    farmers.

15
Labor vs. Other Specialized Resources
  • Farmers as owners of specialized skills benefit
    from programs to assist agriculture.
  • The gains from government programs that reduce
    input prices or increase product prices are
    incorporated into higher market prices of land
    and other assets if property rights are well
    defined and assets can be bought and sold. In
    such cases the farmers wealth increases as a
    result of the increases in asset values.
  • Asset value is based on the expected contribution
    during the contracted time period. The asset
    owner receives an increased return each year as
    long as product price remains higher.

16
Farm Operators and Farm Labor
  • Price supports and subsidized inputs provide
    incentives for increased agricultural production,
    but competition for labor and entrepreneurial
    skills in other sectors tends to equate returns
    throughout the labor market.
  • The supply of labor in agriculture is highly
    responsive to changes in wage rates
  • Changes in product prices and the demand for
    labor result mainly in changes in farm employment
    rather than in changes in returns to farm labor.
    (figure 20-4 pg. 311)

17
The effects of price support programs on the
market for farm labor
  • Some farm programs increase the demand for labor
    whereas others decrease the demand for labor.
  • An increase in product price, all other things
    remaining constant, will increase the quantity of
    output supplied, which will (typically)increase
    the demand for labor.
  • Subsidized credit and tax preferences in
    agriculture reduce the cost of capital relative
    to labor to labor and increase the rate of
    substitution of capital for labor, thereby
    reducing the demand for farm labor.

18
Price Support Programs
  • The effects of subsidized credit, conservation,
    research, and education programs that reduce cost
    and increase supply vary widely between farm
    operators.
  • Programs that increase technology, innovators
    gain in the short run, whereas those who adopt
    the technology later benefit little because of
    the increases in output and reduction in product
    prices.

19
Government Employees
  • Government employees gain from farm programs the
    of USDA employees increased more than four
    times from 1929 to 1999 even as the of farms
    and farmers decreased at a dramatic rate.
  • USDA activities expanded into rural development,
    rural recreation, nutrition, and other areas

20
Resource Allocation
  • Resources are allocated to various uses on the
    basis of market prices
  • Land when allocated by market forces, is based on
    the expected returns. Land has the highest
    expected use in agriculture because it is used
    for farming and housing
  • Prior to the 1996 farm bill production control
    programs in agriculture diverted some of the
    worlds most productive farmland into
    nonproductive uses through various programs

21
Policy Implications
  • The largest 8 of farms received 47 of payments
    to farmers in government farm programs.
  • Farm programs are necessary to stabilize
    agricultural markets, stabilization for farm
    programs is weak, much of the instability in the
    U.S. agriculture since WWII has been caused by
    government policies including fiscal policies,
    subsidized credit, and trade restrictions.

22
Protectionism and the Deregulation of U.S.
Agriculture
  • Programs like NAFTA and WTO were created to
    reduce and eliminate import restrictions.
  • The FAIR act provided farmers with greater
    flexibility in making planting decisions than
    under previous farm bills.
  • The 1996 and 2002 farm bills continue the long
    standing practices of transferring income from
    the non farm sector to the farm sector or the
    U.S. economy

23
THE END
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